Giving Citigroup (C) $50 Billion, Or Much More

It would make sense that Citigroup (C) has been talking to the Fed, FDIC, and Treasury over the last few days. Even if Vikram Pandit wanted to dodge those talks, the feds would knock down his door if necessary.

According to Reuters, the government is considering its options.

Citi is almost certainly not going to go bankrupt. Several media sources said that the Fed tried to get Goldman Sacha (GS) interested in a merger. The investment bank knows better. Citi is a boat anchor the size of the ones carried on Nimitiz-class aircraft carriers.

The Fed could engineer an AIG (AIG)-like takeover. That would put more burden on the agency to watch yet another troubled operation. Owning 80% of something that is completely broken does not have much charm.

That would leave putting more of the Paulson $700 billion bailout money into Citi. How much would it need? Looking at what the FDIC was willing to put into getting Wachovia a partner, Citi might well require between $50 billion and $100 in loans and asset guarantees.That money would probably go in as debt, but it will not be paid back in the lifetime of anyone walking around now.

In other words, the common shareholders would be taking two fish in the boiler room